Partnership Accounting JLM

PARTNERSHIP DISSOLUTION
1. Any major change in partnership ownership such as admission of partner into existing partnerships, or withdrawal
of a partner from existing partnerships dissolves the partnerships. Dissolution of a partnership entity does not
however imply liquidation, for oftentimes the business entity continues its operations undisturbed.

2. There are two ways a new partner can get admitted into the partnerships:
a. admission by investment is one in which the new partner transfers net assets into the partnerships. Thus,
the net assets of the partnerships increase by the amount contributed which said contribution becomes a
new source of capital. Capital credits to all partners upon admission of a new partner will depend upon the
agreement, which can either be net investment method or the bonus method.
b. Admission by purchased interest is one in which the new partner transfers assets directly to one or more
partners (NOT TO THE PARTNERSHIP) in consideration for the purchased interest. Thus, the net assets
of the partnerships remain the same even after the admission of the new partner.

3. If a partner withdraws from the partnership, the partnership must liquidate the withdrawing partner's ownership
equity, as follows:
a. Payment to withdrawing partner will not come from partnership assets- The withdrawing partner may just
sell his interest to the remaining partners or to an outsider with the permission of the remaining partners. In
this case the entry required to be recorded in the books of the partnership is the transfer of interest from
the withdrawing partner t to the buying partner(s) account(s).
b. Payment to the withdrawing partner will come from partnership assets- Under this arrangement, one of
three situations can
i. Payment is equal to the interest withdrawn, which is easily recorded by a debit to the capital account
of the withdrawing partner and a credit for the payment made, since both amounts are equal.
ii. Payment is less than the interest withdrawn, which is recorded with bonus to t the remaining
partners divided in the remaining profit and loss ratio.
iii. Payment is more than the interest withdrawn, the excess is recorded as bonus to the retiring partner
and charged to the remaining partners in the remaining profit and loss ratio.
-done-

Illustrative Problems
I. Jeremiah and Calix are partners with capitals of Php 240, 000 and Php 120,000, respectively. They share in profits in
the ratio of 3:1. The partners agree to admit Ellah as a member of the firm.

Required: Record the admission of Ellah for each of the following situations:
1. Ellah purchases 1/3 interest of Jeremiah and Calix for Php 96, 000 which is divided between them in proportion to
the equities given up.
2. Ellah purchases a 1/3 interest in the firm. Ellah pays the partners Php 180, 000 which is to be divided between them
in proportion to the equities given up. Before Ellah’s admission, however, Inventory undervaluation is recorded on
the firm’s books.
3. Ellah invest the amount needed to give her a 1/3 interest in the capital of the partnership. No goodwill or bonus is
recorded
4. Ellah invest Php 180, 000 for a ½ interest in the firm. No goodwill is recorded.
5. Ellah invest Php 150, 000 for a ¼ interest in the firm. The total firm capital is to be Php 510, 000
6. Ellah invest Php 165, 000 for a ¼ interest in the firm. Goodwill is to be recorded.
7. Ellah invest Php 100, 000 for a ¼ interest in the firm. The assets of the partnership are fairly valued except for Land
account, which is overvalued before Ellah’s admission.

II. The following is a condensed financial position statement of the partnership L, P and Q who share profits or losses in
the ratio of 4:3:3, respectively:
Assets (including loan due from L of Php 20, 000) Php 940, 000

Liabilities (including loan due to Q of Php 30, 000) 240, 000

L, Capital 310, 000
P, Capital 200, 000
Q, Capital 190, 000
Total Equities Php 940, 000

The assets and liabilities are fairly valued, no goodwill or bonus should be recognized when F was admitted for a 20%
interest.
How much should F contribute?
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 Partnership Accounting JLM
III. Capital accounts of the partnership of Bamba and Ellah in January when the partnership was dissolved, follow:
Bamba, Capital Php 80, 000
Ellah, Capital 40, 000

The partners share profits or losses in the ratio of 6:4 respectively. Desperate for funds, they agreed to admit Felise as
a new partner with a one-third interest in capital and upon his investment of Php 30, 000. After admission, assuming
that goodwill is to be recognized, what are the corresponding capital balances of the partners, respectively?

IV. The total partners’ equity was Php 105, 000 excluding goodwill. A partner whose share in the net income is 20%
decided to withdraw from the partnership. He was paid Php 37, 000 by the partnership in final settlement which was
recorded under the goodwill method. The remaining partner’s capital accounts, excluding their share of the goodwill
totaled Php 80, 000 after withdrawal. The computed goodwill of the partnership was?

V. Antz, Jay, and Chris have been partners sharing net incomes and losses in a 3:5:2 ratio. On October 31, the date
Chris retires from the partnership, the equities of the partners are Antz, P104,000; Jay P160,000; and Chris, P40,000.
The estimated profit to October 31 is P80,000 and the partners have appropriately decided to adjust the understated
assets to fair value by P20,000. Present general journal entries to record Chris’s retirement under each of the
following unrelated assumptions.
a. Chris is paid P56,000 in partnership cash for his equity.
b. Chris is paid P60,000 in partnership cash for his equity.
c. Chris is paid P68,000 in partnership cash for his equity.

VI. Miah and Ellah are partners of Super Kids Partnership (who share net income and loss in 80%:20%) organize Super
Kiddos Corporation to take over the net assets of the partnership. The balance sheet of the partnership on June 31,
2020, the date of incorporation, is as follows:
Super Kids Partnership
Statement of Financial Position
June 30, 2020
Assets
Cash P14,400
Trade Accounts Receivable P33,720
Less: Allowance for Doubtful Accounts 720 33,000
Inventories, FIFO 30,600
Equipment at cost P72,000
Less: Accumulated Depreciation 31,200 40,800
Total Assets P118,800
Liabilities and Partner’s Capital
Liabilities:
Trade Accounts Payable P42,000
Partner’s Capital:
Miah, Capital P57,588
Ellah, Capital 19,212 76,800
Total Liabilities and Partner’s Capital P118,800

After an appraisal of the equipment and an audit of the partnership's financial statements, the partners agree that the
following adjustments are required to restate the net assets of the partnership to current fair value:
• Increase the allowance for doubtful accounts to P1,200.
• Increase the inventories to current replacement cost of P36,000.
• Increase the equipment to its reproduction cost new, P84,000, less accumulated depreciation on this basis,
P36,600: that is, to current fair value, P 47,400.
• Recognize accrued liabilities of P1,320.
• Recognize goodwill of P12,000.

Super Kiddos Corporation is authorized to issue 12,000 Shares of P10 par common stock. It issues 9,000 shares of
common stock valued at P11 a share to the partnership in exchange for the net assets of the partnership.
Required: Prepare the required entries to incorporate a new corporation assuming:
1. Partnership books are retained
2. New books are opened for the Super Kiddos Corporation.

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Partnership Accounting JLM
Multiple Choice Problems

1. The equity accounts of the partnership of Roy and Rainier on October 31, 2020 are as follows:
Roy, capital P256,000
Rainier, capital 128,000
Roy, loan (credit) 24,000
Rainier, drawing (debit) 12,000

The partners share profits and losses in the ratio of 3:2, respectively. The partnership is in desperate need of cash, and
the partners agree to admit Raymon as a partner with a 1/3 interest in the capital and profits and losses upon her
investment of P96,000. Immediately after Raymon’s admission, what should be the capital balances of Roy, Rainier,
and Raymon, respectively:
A. P239,200; P 88,800; P164,000
B. P192,000; P192,000; P192,000
C. P213,333; P102,400; P160,000
D. P217,600; P102,400; P160,000

2. The following capital accounts pertain to Ellery Partnership:

Capital P/L Ratio
Nikki P200,000 40%
Mike 240,000 60%

Adie is admitted by purchase of one-half interest of both Nikki and Mike, for P240,000. The P240,000 is divided between
Nikki and Mike as follows:
A. Nikki, P96,000; Mike, P144,000
B. Nikki, P108,000; Mike, P132,000
C. Nikki, P109,090; Mike, P130,910
D. Nikki, P120,000; Mike, P120,000

3. Egay and Thessa are partners who share profits and losses in the ratio of 4:6, respectively. On May 1, 2019, their
respective balances were as follows:
Egay, capital P 60,000
Thessa, capital 50,000
Egay, drawing (debit) 5,000
Loan to Egay 15,000
Loan from Thessa 20,000

On that date, Hannah was admitted as a partner with a one third interest in capital and profits for an investment P40,000.
Immediately upon Hannah’s admission, Egay’s capital should be
A. P34,667
B. P54,000
C. P56,000
D. P60,000

4. The following balances as of the end of 2020 for the partnership of Romy, Mon, and Boboy, together with their
respective profit and loss percentages, were as follows:
Assets P 360,000 Romy, loan P 18,000
Romy, capital (20%) 84,000
Mon, capital (20%) 78,000
Boboy, capital (60%) 180,000
P 360,000 P 360,000

Romy decided to retire from the partnership. Parties agreed to adjust the assets to their fair market value of P432,000
as of December 31, 2020. Romy will be paid P122,400 for Romy's partnership interest inclusive of Romy loan which is
to be repaid in full. After Romy's retirement, what will be the balance of Mon's capital account?
A. P78,000
B. P92,400
C. P72,900
D. P90,900

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Partnership Accounting JLM
5. On June 30, 2020, the balance sheet for the partnership of Dez, Dennis, and Antz and their profit and loss ratios were
as follows:
Assets, at cost P 600,000
Dez, loan P 30,000
Dez, capital (20%) 140,000
Dennis, capital (20%) 130,000
Antz, capital (60%) 300,000
Total equities P 600,000

Dez decided to retire from the partnership and by mutual agreement, the assets were adjusted to their current fair value
of P720,000. The partnership paid P204,000 cash for Dez’s equity in the partnership, exclusive of the loan which was
repaid in full. 2. The capital balances of Dennis and Antz, respectively, after Dez’s retirement from the partnership was:
A. P144,000; P342,000
B. P154,000; P372,000
C. P120,000; P270,000
D. P164,000; P402,000

6. Dan, Marose, and Tonet are partners dividing profits and losses in the ratio of 2:3:3, respectively. Their capital
balances on December 31, 2016 were:
Dan P 90,000
Marose 70,000
Tonet 110,000

Tonet is retiring from the partnership as of April 30, 2019. After the retirement of Tonet, Dan and Marose will divide
profit or loss in the remaining original ratio. The partnership reported net income of P789,000 for the year 2019. Tonet
is to be paid an amount equal to 80% of his adjusted equity as of the date of his retirement. Assuming that the net
income is considered as having been realized evenly throughout the year, how much is the capital balance of Marose
as of December 31, 2019?
A. P509,260
B. P456,660
C. P382,840
D. P484,225

7. The partnership of Elders provides for 3:3:4 sharing in profits and losses to Adones, Meinrado, and Rogelio,
respectively. Rogelio is retiring from the partnership and by mutual agreement the assets are to be adjusted to their fair
values which is P37,500 higher than their carrying amounts. Adones and Meinrado agree that the partnership will pay
P108,750 to Rogelio for his partnership interest, exclusive of his loan which is to be paid in full separately. Before the
retirement of Rogelio, total assets, Rogelio, loan, Adones, capital, Meinrado, capital, and Rogelio, capital has the
following balances, respectively: P250,000, P25,000, P62,500, P75,000, and P87,500. Which of the following is not
correct?
A. The total amount paid to Rogelio including his loan is P133,750.
B. The balance of Adones, capital after Rogelio’s retirement is P70,625.
C. The total assets after Rogelio’s retirement is P160,000.
D. The share of Meinrado in the excess payment to Rogelio is P3,125.

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